Consumer Group Calls on CPUC to Block Davis Power Grab

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Plan Would Give Conflict-Ridden DWR Total Authority Without Accountability

Read FTCR’s comments on the Rate Agreement

The Foundation for Taxpayer and Consumer Rights (FTCR) called on the California Public Utilities Commission (PUC) to reject PUC President Loretta Lynch’s proposed Rate Agreement with the California Department of Water Resources (DWR), in formal comments filed with the Commission Wednesday evening. The Agreement would allow the DWR to raise electric rates, or maintain unnecessarily high prices, without any public process or PUC review. The plan permits the DWR, which has been plagued by a series of revelations about internal conflicts of interest, to pass on to ratepayers an expansive list of costs incurred by the agency, including consultant costs, legal expenses, and the payment of power companies’ pollution penalties.

“The plan would allow a state agency to operate behind closed doors while it negotiates with ratepayers’ money,” said Douglas Heller, consumer advocate with FTCR. “Secrecy in DWR leads to conflicts of interest and that leads to higher rates. The public depends upon openness and transparency in state government, and this proposal denies both.”

FTCR notes that while the PUC is a constitutional agency with Commissioners who cannot be fired by the Governor, the DWR is directed by a gubernatorial appointee serving at the pleasure of the Governor. And while the PUC decision-making process is public, the activities of the DWR are secretive. In its comments, FTCR argues that the Governor should not be authorized to garner such expansive and unscrutinized control over the state’s energy system.

The rate agreement would undermine public oversight of electric rates by requiring the PUC to approve, without review, rate increases “to satisfy the Retail Revenue Requirements as specified by the Department [DWR],” according to the proposed Agreement.

“The PUC is set to reduce itself to a rubber-stamp agency for the Governor and relinquish some of the remaining consumer protections that exist in the wake of the deregulation fiasco,” said Heller. “This plan would deregulate the Governor and remove the checks and balances that are necessary to protect consumers from the continuing problems of energy deregulation.”

Bondholders need security, not an over-reaching rate agreement

The chief purpose of the proposed Rate Agreement is to guarantee that a secure rate stream will be available to make payments associated with a state bond issuance of up to $13.4 billion dollars. The bonds are meant to repay the State General Fund, which has served as the bank for DWR power purchases since January of this year. Legislation by Senator John Burton — SB 2x 18 — which has cleared the Senate, would provide bondholders with sufficient security to purchase the state bonds. In the formal comments, FTCR explains that this Rate Agreement goes far beyond the securitization required by prospective bondholders and is, therefore, unnecessary and unacceptable.

“As the state’s energy problems turn from an electricity crisis to a political crisis, Californians need a meaningful public process to assess state power operations,” said Heller.


August 1, 2001

Via Fax and Hand Delivery

Loretta Lynch, President

California Public Utilities Commission

505 Van Ness Ave

San Francisco, CA 94102

Fax: (415) 703-3933

Re: A.00-11-038 et al

PUC draft Rate Agreement — OPPOSE

Dear President Lynch:

The Foundation for Taxpayer and Consumer Rights (FTCR), a non-profit, non-partisan organization, opposes the California Public Utilities Commission‘s (PUC) draft Rate Agreement. FTCR is a non-party with a direct interest in the Rate Agreement.

It is our primary concern that this proposal would undermine critical ratepayer protections and processes established to ensure that electricity rates charged to customers are reasonable and appropriate. Furthermore, the public depends upon openness and transparency in state government, and this proposal denies both.

The chief purpose of the proposed Rate Agreement, as well as an alternative proposal in the California Legislature (Senate Bill x2 18), is to guarantee that a secure rate stream will be available to make payments associated with a state bond issuance of up to thirteen billion dollars. The bonds are meant to repay the State General Fund, which has served as the bank for DWR power purchases since January of this year. As we explain below, the Rate Agreement goes far beyond the securitization required by prospective bondholders and is, therefore, unnecessary and unacceptable.

Since January of this year, the California Department of Water Resources (DWR) has spent approximately eight billion dollars of taxpayer money in the process of procuring electricity and has committed tens of billions of ratepayer dollars to future power purchases. On July 18th the PUC issued a draft “Rate Agreement” that would allow the DWR to pass all of its energy-related costs on to ratepayers without public review. By removing the DWR from the PUC‘s jurisdiction, the PUC proposes to deny its own constitutional authority to: “fix rates, establish rules, examine records, issue subpoenas, administer oaths, take testimony, punish for contempt and prescribe a uniform system of accounts for all public utilities subject to its jurisdiction.”

The Rate Agreement would undermine public oversight of electricity rates.

California ratepayers depend on the PUC to ensure that rates are just and reasonable and properly related to the cost of procuring power. Consumers rely on the expertise and experience of the PUC to ensure that they are not unjustly burdened by inefficiencies, mismanagement, or conflicts of interest within power-procuring entities. A utility, until this year the primary procurer of power for California energy consumers, would not be allowed to pass all its costs on to ratepayers without the PUC first scrutinizing its procedures, practices and costs. While the procurer has changed, the need for accountability has not.

The PUC proposed draft Rate Agreement would single-handedly make obsolete critical PUC consumer protection responsibilities. Under the plan, the DWR — an agency without a public process and accountable only to the Governor– will be granted unprecedented and disconcerting powers and privileges, particularly to increase rates, or continue unnecessarily high prices, for consumers without review. The proposal states that:

“The [Public Utilities] Commission acknowledges that the Department [of Water Resources] is entitled under this Agreement to recover [from ratepayers] such amounts at such times as shall be sufficient ‘ to provide for the payment of Bond Related Costs and Operating Expenses.”

The Rate Covenant contained in the Agreement creates an irrevocable contract that requires the PUC to impose any rate hikes requested by the DWR:

“The [Public Utilities] Commission hereby covenants and agrees to calculate, revise and impose, from time to time, Department [DWR] Charges for Power sold by the Department to Retail End Use Customers sufficient to provide moneys in the amounts and at the times necessary to satisfy the Retail Revenue Requirements as specified by the Department.”

Although all its costs will be payable by ratepayers on demand, neither the PUC nor consumers will ever know the answers to a range of pertinent questions about the operations of the DWR. For example, the public should know and review the agency’s power procurement strategies and procedures.

  • Is the DWR efficient?

  • Does DWR purchase power at the cheapest available price?

  • What are the consequences when DWR energy traders make a mistake or overpay for power?

  • Who pays for that mistake? We can only assume it will be the ratepayers, if the Agreement is in place.

  • How does DWR protect against conflicts of interest?

  • What frivolous and undocumented expenses will be funneled to ratepayer bills?

In a regulated or otherwise publicly accountable environment, these questions are of the utmost importance in determining the validity of rates charged to consumers. In the environment that would be established by this Rate Agreement, these questions are muted entirely.

The Agreement would grant DWR carte blanche authority to spend consumers’ money as the agency deems necessary, whenever it chooses, with as little as 30 days notice to the public. The Agreement would exempt the DWR from decades-old regulatory checks and balances designed to protect consumers’ interests. It would deny the public a role in assessing, and the PUC‘s constitutional right to question, the state power procurer’s decisions on behalf of ratepayers, its operational acumen or its administrative conduct and efficiency.

The Rate Agreement exceeds the statutory concern it is meant to address

The statute to which the PUC cites its authority to enact a rate agreement does not require the PUC to enter into such an agreement. The relevant sections of the governing statute (Water Code Sections 80110 and 80130) state that the PUC “may enter into an agreement with the department” with regard to collecting power costs and “may include, but is not limited to, an agreement between the department and the commission,” (emphases added) with regard to the collection of bond debt from ratepayers. Neither section, however, mandates such an agreement.

The legislation that enabled the power buying function of DWR (Assembly Bill x1 1, signed by Governor Davis on February 1, 2001,) does not require such a comprehensive dismantling of PUC oversight functions as is proposed in this agreement. The far-reaching nature of this proposal thus construes AB x1 1 too liberally by requiring the PUC to cede its constitutional and statutory powers to the Department. According to AB x1 1, Section 80134 of the Water Code establishes six factors to be considered in the establishment of revenue requirements, but the proposed rate agreement provides for eighteen factors that the DWR can pass onto consumers without review.

Among the statutorily unauthorized factors that the proposed Rate Agreement would allow DWR to pass on to customers without public scrutiny are the following:

  • DWR expenses on consulting services;

  • The payment of power companies’ emission costs and emission opportunity costs;

  • Programs that pay businesses to use less power; and

  • The legal expenses of the DWR.

Furthermore, the Rate Agreement definition of “Operating Expenses” includes the expansive language “including but not limited to,” which would allow the DWR to pass through a myriad of undisclosed costs to consumers. The public should not be held financially responsible for such an extensive array of expenses based solely upon an agency’s internal reasonableness review that is entirely free of public oversight.

The DWR’s six-month history demonstrates the need for public oversight.

The inappropriateness of allowing DWR to dictate consumer rates free of oversight is exacerbated by the agency’s inefficient, secretive, and dubiously competent history.

Since taking the role of the state’s primary power-buying agency, the DWR has signed an estimated $43 to $90 billion in long-term power contracts at rates far exceeding both current spot-market prices and anticipated long-range energy prices, thereby locking ratepayers into decades of overpriced bills. As a result of its procurement strategy, DWR has purchased more power than Californians demand, leaving ratepayers to fund both the consumed and superfluous supply. Reports indicate that the over-purchase of supply has cost taxpayers an estimated $30-35 million in the month of July, 2001 alone. The 8% miscue by the DWR should be subject to review by the PUC to determine whether or not the Department’s procurement strategies are sound. A regulated utility would be required to demonstrate the necessity and appropriateness of its procurement strategy in the wake of such a loss. According to the Rate Agreement, these costs are indisputably passed on to the ratepayer. In effect, there would be no consequences for failure under this plan.

For the next 18 months, the DWR, under AB 1x, may continue to purchase power and negotiate long-term power contracts with generators. In reviewing the terms of those contracts already negotiated, it is evident that future negotiations between the DWR and power companies demand public oversight. Some of the contracts, for example, include provisions that have the effect of denying the state the right to impose a windfall profits tax on energy companies that gouge California. Allowing the DWR to negotiate not only consumer rates but also the state’s constitutional power of taxation, behind closed doors, undermines the state’s effort to challenge the behavior of the energy companies and hold them accountable for price gouging.

Ethical standards and hiring practices at the DWR are suspect.

In recent weeks a series of disconcerting conflicts of interest within the DWR have come to light. It has been shown that some of the DWR’s consultants and energy traders own stock in energy companies. As such, these public employees may have personal economic interest in increased power prices. The fact that the Director of the DWR does not have standards in place that would protect against these conflicts is reason enough to deny this Rate Agreement.

The hiring practices of the DWR are likewise suspect. One consultant, with one year’s experience in the energy field, was recently appointed to a top-level position with a two-year salary of $480,000. Free from public oversight this exorbitantly paid novice commands the authority to “manage [state] energy traders and schedulers, operating a 7-day per week, 24-hour per day operation'[and] will be responsible for the management of the [state] energy portfolio,” according to the DWR contract.

If the state’s power procurement activities and review of those activities is handled “in-house,” this agreement empowers the DWR to act, in the words of PUC Commissioner Richard Bilas as “prosecutor, judge and jury.” It is our belief that no state agency should have that power, and the recent revelations about staff behavior serve to highlight the problem of such total control.

Electricity rate-setting authority would move from a transparent commission to a secretive agency strictly controlled by the Governor.

The Public Utilities Commission process for determining electric rates is subject to public review and participation, while the Department of Water Resources is not. The five members of the Commission, who are appointed by the Governor but cannot be removed by the Governor, serve six-year terms on a staggered-appointment basis. The single director of the DWR serves at the pleasure of the Governor. In short, this Rate Agreement marks an unprecedented transfer of authority from the Public Utilities Commission, with its constitutionally derived powers, to the Governor.

In order to ensure that the state’s purchasing of electricity is efficient and sensible, it is essential that both the public and the PUC can exercise the right to question and scrutinize the actions of this previously obscure agency, and its exclusive overseer, Governor Davis. If the state is to be in the business of buying power for the public, then the Governor and DWR should be held accountable as they spend consumers’ money. Fifty billion dollars of “power related costs” should not be charged to consumers without review.

The proposed Rate Agreement, if approved on August 23, will reduce the PUC to nothing more than a rubber stamp for Governor Davis and his energy consultants at DWR. The PUC will be obligated to carry out the DWR’s demand for any and all ratepayer funds, without review.

The Foundation for Taxpayer and Consumer Rights urges that the Public Utilities Commission ensure a meaningful public process to assess state power operations and, therefore, reject the proposed Rate Agreement.


Douglas Heller
Emmy Rhine

Cc: Chief Administrative Law Judge, Lynn T. Carew

Geoffrey Dryvynsde

Administrative Law Judge, Christine M. Walwyn

Administrative Law Judge, Joseph R. DeUlloa

Administrative Law Judge, John S. Wong

Administrative Law Judge, Thomas R. Pulsifer

A.00-11-038 Service List

Consumer Watchdog
Consumer Watchdog
Providing an effective voice for American consumers in an era when special interests dominate public discourse, government and politics. Non-partisan.

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